The following invention relates to a system and method for trading securities and, in particular, for a system and method of submitting pair trade requests.
A recognized strategy for trading securities is known as pair-trading. Pair-trading is a non-directional investment strategy in which the investor identifies two securities having similar characteristics and the securities are currently trading at a price relationship that is out of their historical trading range. The investor exploits the price relationship between the securities by buying the undervalued security while short-selling the overvalued security. Because pair-trading is a market-neutral strategy, it is a particularly desirable strategy for investing in volatile markets.
One context in which pair trading is useful is where an investor desires to take advantage of an arbitrage opportunity resulting from a merger between two companies. For example, Company A has announced a definitive agreement to acquire Company T in which case Company T shareholders will receive 0.5 shares of Company A stock for each share of Company T stock they own. The investor desires to capture the “spread” between the offered consideration (0.5 shares of A) and the price of T stock. To do this, the investor buys shares in T stock and sells shares of A stock.
For instance, if stock T is trading at $28 per share and stock A is trading at $60 per share, then the investor may execute a trade for 200,000 spreads by buying 200,000 shares of T stock and selling 100,000 shares of A stock. After the merger takes place, the investor will cover the short position in stock A with the 100,000 shares of A stock the investors receives in exchange of the 200,000 shares the investor held of stock T. Thus, by executing the pair trade, the investor locks in a $400,000 profit (assuming that the merger goes through).
An investor desiring to execute a pair trade first formulates a pair trade request. A pair trade request is characterized by a plurality of parameters including, for example, a spread quantity, a buy ticker, a sell ticker, a buy trading ratio, a sell trading ratio, whether to trade oddlots, whether to execute a short sale, whether to work the bid side of a spread (i.e., buy stock first and take short-sale execution risk), a minimum wave size (i.e., the minimum share amount per tranche), a maximum wave size (i.e., the maximum share amount per tranche), a slippage factor, a wave stop loss unit, a nuisance cancel amount, an improve cancel unit, a minimum order distance, an order limit type (e.g., dollar difference, percent premium or discount, sell over buy or buy over sell, cash-adjusted) and order limit parameters (e.g., buy calculation ratio, sell calculation ratio, cash offset). Once a pair trade request is formulated, the investor typically presents the pair trade request to a broker affiliated with a financial institution for execution.
Because the formulation of a pair trade request requires that the investor specify numerous parameters, it takes time for the investor to prepare and submit a pair trade request to exploit a particular market condition. This time required may cause an investor to miss a potentially profitable trading opportunity, especially in fast-moving markets.
Accordingly, it is desirable to provide a system and method for submitting pair trade requests.